UAL, US Air Now Must Face Woes
Failed Merger Was Supposed to Fix

Termination of
UAL Corp.'s
proposed $4.3 billion acquisition of
US Airways Group Inc.
leaves the two airlines to grapple with fundamental problems they had hoped the big merger would fix.

Hours after the Justice Department said Friday that it would sue to stop the merger on antitrust grounds, UAL's United Airlines, the nation's second-largest carrier, and No. 6 US Airways agreed to end their May 2000 merger pact without litigation. United said it would pay US Airways a $50 million breakup fee.

The Justice Department's move also appears to cut short for the foreseeable future what was expected to be a new round of big airline mergers, even as the industry posts slumping revenues and big losses brought on by rising fuel and labor costs and a sudden drop in business travel -- a mainstay of airline profits.

"While mergers can further competition, this one does not," U.S. Attorney General John Ashcroft said in a statement. The Justice Department said the acquisition would have created a monopoly or duopoly in more than 30 nonstop routes in markets valued at more than $1.6 billion a year. It also said the deal would have limited competition on other routes valued at $4 billion in annual consumer spending.

US Airways said it was disappointed. UAL said it will focus on restoring profitability, settling outstanding labor contracts and improving customer service.

The combination of United and US Airways would have created the country's biggest carrier, controlling more than 27% of the domestic market. It faced intense opposition from the start from consumers, politicians and regulators. "It should now be clear to the major airlines that the federal government believes the airline industry is too concentrated and that the barriers to entry are too high to allow further combinations," said Kevin Mitchell, chairman of Business Travel Coalition, which represents corporate travel interests.

The big question is what UAL and US Airways are going to do now.

"Some people portrayed US Airways as the failing carrier," said Sam Buttrick, an analyst for UBS Warburg. "With losses approaching $1 billion this year, United appears to be seeking that title."

US Airways "was United's answer to the East Coast, particularly the Northeast," where Chicago-based United was hoping to beef up its presence, Mr. Buttrick said, noting that
AMR Corp.'s
American Airlines and
Delta Air Lines
have been expanding in the important Boston and New York markets. Moreover, American stole the march on United in April by acquiring insolvent Trans World Airlines, which vaulted American ahead of United as the world's largest airline.

US Airways, plagued by high costs and a stunted route network, has lost money in the past four quarters and is expected to stay in the red this year and next. Although it has a strong presence in New York, Boston and Washington and three East Coast hubs, US Airways has been hurt by the expansion of low-fare airlines on its turf. Because it is smaller than the other major carriers, US Airways doesn't offer a far-flung route network that appeals to corporate travel buyers.

With more than $1 billion in cash, US Airways would appear to have options it can exercise. The carrier has ruled out being broken up, and said it plans to move forward with a plan "to address the competitive environment." Chief Executive Rakesh Gangwal has summoned union leaders to US Airways' Arlington, Va., headquarters for a meeting Monday, and it is expected the company this week will begin outlining its going-forward strategy in communications with employees.

"As the smallest of the six major airlines, growth is a greater imperative for US Airways," Mr. Buttrick, the analyst, said. He said it must explore joining an international airline alliance, as have all the other major network carriers, and seek to enter into a domestic marketing arrangement with a large carrier. Mr. Buttrick also believes US Airways should expand its transcontinental flying, serve more large cities from the Northeast and put more regional jets into service to fly "thin" routes economically. US Airways has already addressed some of these issues, including increasing its number of flights to Europe.

The unwinding of the deal also means that American Airlines won't be buying $1.2 billion of US Airways assets from United, and that Robert Johnson, a Washington media entrepreneur and US Airways director, won't be purchasing US Airways' slots at Washington's Reagan National Airport to form the basis of a new carrier called DC Air. Both of those plans were intended to appease Justice Department concerns that a United-US Airways combination would stifle competition in the Northeast.

Justice didn't buy it. "In the final analysis," said R. Hewitt Pate, deputy assistant attorney general, "the core of the proposed remedy -- a divestiture of assets at Reagan National Airport and a promise by American Airlines to fly five routes on a nonstop basis -- would not adequately replace the competitive pressure a carrier like US Airways brings to the marketplace."

Mr. Johnson expressed disappointment Friday. American noted that its transaction was contingent on the United-US Airways deal, and declined to comment further.

Jan. 8, 2001: United announces it is bringing American Airlines into deal as buyer of $1.2 billion of US Airways assets.

May 2001: United and US Airways ask the Justice Department to delay action on the merger plan pending the submission of new proposals.

July 2, 2001: United says it wants to drop the merger in the face of DOJ opposition and asks US Airways to agree.

July 12, 2001: After US Airways refuses to drop the merger and threatens to sue, the two airlines ask DOJ to make a decision.

July 27, 2001: DOJ concludes the deal would reduce competition and harm consumers and threatens to sue. The airlines then terminate their merger agreement and United agrees to pay US Airways a $50 million breakup fee.